Every VC funded tech startup (read: all of them) in California uses SVB. These were not all corporations making 0IQ decisions are like your average AAA game studio, or multibillionaire woke fiesta. Many were trying to improve things you found subpar. Whether it was agricultural pesticides that were less toxic than glyphosate, or more scalable rocket production, or just another SaaS company. Its collapse (were it not promptly bailed out) should be lamented yet warranted for bad decision making.
Right wing troglodytes and neo-luddites (I say this since left wingers tend to congregate in cities and at least attempt to be tech savy which brings about other perhaps worse traits) blame the collapse on woke nonsense or try to rub their two neurons together and piece together the semblance of financial knowledge they have to say “me think it because they give loan to unqualified people*” (*with obvious undertones). A quick glance at SVB’s 10Q counters the claims of the 10IQ crowd that loans were given out based on victimhood status or for grifts. VC’s are not in the business of investing in garbage, that’s the government’s job (and companies so big no matter what idiotic decisions they make they seem to stilll make billions).
So why did SVB (and Signature Bank and Silvergate Bank, although silvergate wasn’t bailed out) collapse? Surprisingly it wasn’t because of its investments in mortgage backed securities that are sensitive to interest rate changes (but that stupid decision probably did contribute). When most people think of a bank run and a collapse, they think the bank is insolvent as was the case with the crypto company FTX, that is, the bank simply has no money. However, with these banks, the banks were simply illiquid, meaning they had the money, just not now. The thing with banks is that they do not keep all of your money. The fractional reserve banking system makes it such that the bank keeps some of the money in case you want it, and uses the rest of it to make more money. The federal reserve comes up with this number (allegedly through intelligent calculations) and the banks then must keep (for example) 10% of their money in the bank and loan out the remaining 90%. If people want 11% of their money back, the bank is illiquid and must wait for a while to get the money back. Typically the money lent out is invested in low risk highly liquid assets such as bonds and can easily be sold and the money can be given back with a short delay. If you ever ask for $1 million in cash, the bank will let you know that you cannot pick it up the same day. Why did I use for example instead of saying the actual rate? The actual rate is 0%. Yes, zero percent.
So SVB and others invested heavily in low rate treasury securities (to be clear they are not betting on government securities, even they are not that stupid, they are legally required to, they have stringent asset and liability management, risk management, stress testing for metrics including liquidity, Net Interest Income, loan to deposit ratios, concentrations, and more). In 2022, SVB held $117 billion of its $200B+ in assets in these securities. Now how do bonds work? Bonds are traded on par value, discount, or premium value with par being the “fair value” based on a simple formula (I don’t think Substack support LaTeX).
∑i=1n C/(1+r)n + (F/(1+r)n)
Where C = Periodic coupon payment, F = Face / Par value of bond, r = Yield to maturity (YTM) and n is the number of periods until maturity. The par value is is determined by how much money the company or government needs, the coupon rate is the interest rate (~1.6% in the case of these banks), number of years of maturity is the time until you get the full amount of your money back and no more interest, and the YTM rate is basically the discount ratio (how much you’d get from the market from something with a similar risk). Simply, add up the present values of all of the cash flows to find the value of the bond if you sold it instead of held it. So when the discount rate should be 5% (based on the value of bonds today and the discount ratio today), the value for the same parameters would be significantly less than what they bought it for. In SVB’s case, $91 billion of their bond portfolio was in held to maturity (HTM) bonds that when they sold was worth ~$75 billion and thus they posted a $16 billion loss in 2022. Although to investors, this didn’t matter since on their 10K/10Qs they didn’t have to post any losses based on their accounting methods they didn’t have to list HTM bonds as losses as they are recognized at cost value. On March 7th, CEO Greg Becker wasn’t asked about any of these problems, while at the same time, it was clear the end was nigh, so much so that many of the top brass at SVB had sold stock a few days earlier than normally scheduled. While bonuses getting paid out at this time for 2022 earnings is not suspicious, after posting such monumental losses, there should be no bonuses. If SVB had ended up in bankruptcy court and was not bailed out (I’ll discuss this later), the court would have no choice under the law but to order that these bonuses be paid out ahead of any payouts on uninsured deposits since they are higher up on the hierarchy of creditors. The FDIC also needs the SVB staff to stay on to make sure thte takeover and government intervention goes smoothly and if they didn’t get paid what they were entitled to, there would be lawsuits and anarchy at the bank so much so that employees are paid 1.5x their salary to stay on.
It’s not the bank’s fault that the federal government has been messing with the economy in a way that forced the Fed to raise interest rates, incinerating the value of treasuries and making it so that any industries sensitive to interest rate movements and risky businesses such as tech were inherently riskier than most were pushed over the financial cliff. I think the blame should be with the government mostly, but partially with SVB (which I’ll get to), and even partially to hysteria (as are many financial disasters).
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Hysteria:
Mainstreet investors do not heavily scrutinize financial fundamentals, they are driven by hysteria and meme magic. The fear for SVB started with SVBUK falling into court ordered insolvency proceedings (and was later bought by HSBC for $1.21) There is no direct connection between the US-based SVB bank's financial condition and that of the UK entity (other than the fact that both had executives such as the head of risk management involved in woke nonsense). This accelerated the contagion, causing artificial financial crises at unrelated banks in Europe and later the US. This is a psychology-driven bank run as are most. The financial and economic fundamentals don't support what is happening. After SVB’s collapse, the financial contagion spread even more. More banks that have much better risk management are also suffering immensely.
And this was just the start. Californian banks have long queues of people wanting to withdraw their money standing in line for hours scaring onlookers and further spreading the contagion. Even more banking related and SVB exposed stocks are collapsing making today look like “Black Monday.” More banks are cash starved for other reasons even further worsening the contagion, so much so the Federal Home Loan Bank which gives money to smaller banks is cash starved. Western Alliance stocks fell by 80% as the contagion spreads more and more. Even after the Fed stepped in to try and solve the problem, the contagion is worse than ever with NYSE equities even stopping trading for many tickers.
Maybe some hysteria is warranted as the ultimate sign of a stock’s demise is Jim Cramer’s buy list. His reverse midas touch also brought down Signature bank.
Incompetence:
While we can’t blame SVB for the increased interest rates, anyone with any degree of competence would have sold their 1.6% interest bonds for closer to 100% of purchase value months to years ago. This would only be possible if they had assumed inflation was a problem and interest rate hikes were inevitable. But the regulators for SVB from the Fed did not even think inflation was a problem. They are brainwashed by mainstream media and are no longer crunching numbers. Mediocre people surround themselves with mediocre or worse who base everything off of feeling instead of crunching numbers and executives make irrational decisions that make them profits but not their shareholders. The author of the Dodd Frank Bill sat on the board of the collapsed Signature Bank which reflects how shallow banking “regulations” often are. It could be argued the Dodd Frank act may have contributed to a less liquid market (which contributed to this collapse and may have been predicted by the WSJ in 2015) as Chase CEO Jamie Dimon argued. At the same time, the scant few regulations were further rolled back under the Trump regime with the Economic Growth, Regulatory Relief, and Consumer Protection Act though only applying to smaller banks which I would argue didn’t contribute much to this if not for a lobbying rule from the CEO of SVB that changed the definition of smaller banks. Because of the Trump era EGRRCPA eliminated important elements of Dodd-Frank’s Title I, Silicon Valley Bank and other banks of that asset size, are not required to calculate and report the Liquidity Coverage Ratio, the Net Stable Funding Ratio, or to conduct comprehensive liquidity assessment reviews, though even with these, it wouldn’t matter much since the liquidity and funding ratios would be compliant (thus the heavy investment in bonds) if not for the interest rate spikes. This should not be blamed on Trump or on Biden for not reversing this Trump era EO. I would argue in general the regulations mattered much less (businesses want to remain solvent and will inadvertently follow regulations even if none are imposed in order to stay in business) than the overall economic situation we are in because of government mishandling (and my opinion is somewhat backed by Cornell professor Bob Hockett).
There is also blame entirely on SVB’s risk management (that would not have been caught by Dodd Frank regulations). From this article:
SVB also had a concentrated client base of tech startups whose needs for capital were highly sensitive to rising interest rates. Yet SVB itself had the highest concentration of any major bank in mortgage-backed securities, also especially sensitive to that risk factor. This is an egregious oversight specific to SVB. Its investment portfolio was 57% of total assets, more than twice its peer average of 24%.
Regulations require banks to hold high-quality liquid assets, and these can be categorized as available for sale (AFS) or held to maturity (HTM). With AFS investments, unrealized gains and losses don’t hit a bank’s profit-and-loss statement, but they do affect capital. Booking bonds in HTM prevents gains and losses from showing up at all. SVB booked $91 billion out of $120 billion in the most favorable HTM category, and only $26 billion as AFS. Why would the bank hold only $26 billion in AFS when it knew it had a concentrated, high-risk deposit base?
SVB intentionally decided not to hedge its interest-rate risk. This is shocking given that its $120 billion securities portfolio had a duration of 5.6 years, meaning a 200-basis-point increase in the five-year rate would equate to a $14 billion loss, roughly equal to SVB’s entire capital base. As recently as December 2021, SVB held a modest $10 billion of interest-rate swaps, so it knew the technique. CEO Greg Becker should have known better too. Until Friday he was a board member of the San Francisco Fed. He was also savvy enough to sell $3.6 million in stock days before his bank collapsed.
Either SVB was incompetent or this is a case of moral hazard, taking excessive risk and expecting political favors and bailouts. It turns o[u]t SVB’s real “hedge” was to curry favor with the Biden administration. In 2022 SVB publicly committed $5 billion in “sustainable finance and carbon neutral operations to support a healthier planet.”
Government:
99% of the blame lies in the government interest rate spike. And now further blame will fall with the government for the bailouts. This is a bailout for VC and banking. Many who I respect but are in the tech and finance world are yelling fire in a crowded theater such as David Sacks and Bill Ackman, 5,000 tech CEOs, as well as economists claiming that the government must bailout SVB and then broker the sale of SVB to some larger bank (leading to more bank consolidation).
Notice how Silvergate did not get bailed out but SVB and Signature did. The claim is that this will cost the taxpayers zero and it will be entirely funded by the DIF which is dubious. What if the DIF is emptied (which it will be after this) and then another somewhat significant bank collapse has no money for a bailout and the same lack of confidence will spread. SVB did not deserve this bailout. Their shareholders all lost their money while executives profited. Depositors should have received part of their money from the sold assets of SVB and then SVB should have filed bankruptcy. It made bad decisions it should reap the losses. The rule of government is to socialize losses and privatize profits. When Goldman Sachs loses $824 billion dollars, bailout. When a small bank loses millions that loans only to local businesses, nothing. When a veteran who took a bullet to save people gets cancer and asks for free treatment, sorry we’re broke. There may be no taxes increased for this, but what will likely happen is reduced interest rates, which leads to more inflation which is the biggest tax of all.
Regular banks aren’t bailed out but “too big to fail” systemically important G-SIFI or similar sized large banks are. This sends a signal, if you have more than FDIC $250,000, bank with the big guys or risk a collapse. This leads to more consolidation. More HSBCs buying banks for $1, more small banks like Silvergate (still billions btw) or local credit unions collapsing due to monetary and fiscal policy that are then seized. If you aren’t big enough, perhaps if you play on the correct team, your previously <$250B asset not systemically important bank becomes systemically important only when it comes to the losses, but not when it comes to the compliance and profits. Even banks that did everything right and were not making asinine decisions are punished as everyone migrates to big banks and divests from small bank stocks and withdraws from the even smaller banks.
To quote Andrew Jackson (unsavory for the Trail of Tears though Van Buren may be more to blame for that), the only President to have balanced the budget and have a debt free country,
“If the people only understood the rank injustice of our money and banking system, there would be a revolution before morning.”
Some people I discussed with said that my piece insinuated that bank runs won't happen but they did. That's not what I said, the hysteria part can hurt any bank no matter how sound the fundamentals. These recent cash lifelines to banks have only shown how far the contagion has stretched rather than the severity of the illiquidity/insolvency of banks. SVB itself had mostly sound financials except for the interest rate impacted HTM/AFS nonsense (e.g. it's loans were actually making good money). Signature bank had even better fundamentals and had even stopped the bleeding (see this article: https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failure-in-us-history.html) and yet was completely purged.
More on the financial fundamentals here: https://www.netinterest.co/p/contagion?utm_source=%2Finbox&utm_medium=reader2
A quote from a board member of Signature bank "‘I think part of what happened was that regulators wanted to send a very strong anti-crypto message,’ Frank said. ‘We became the poster boy because there was no insolvency based on the fundamentals.’” Was this a bailout? Hardly. It falls into the bank consolidation part of my post. Maybe they should have played the game and given Janet Yellen some speaking fees? (https://www.theguardian.com/business/2021/jan/01/janet-yellen-speaking-fees-us-treasury-secretary#). Why do you think she got those fees? Obviously because of her incredible elocution skills (https://twitter.com/SeidlerCorp/status/1636518949872451584?s=20).
As far as the bailout go, preferential treatment is only given to a specific subset of banks that stay in line. While woke politics in investing didn't take down this bank, it may have helped it get bailed out. When political "titans" like Gavin Newsom bank there and the entire VC market being politically skewed towards the current administration, it makes the bailouts more likely.
“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.” --Frederic Bastiat
When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you - When you see corruption being rewarded and honesty becoming a self-sacrifice - You may know that your society is doomed.” --Ayn Rand
For more on corruption in banking and SVB.
https://www.nakedcapitalism.com/2023/03/michael-hudson-talks-to-ben-norton-about-svb-and-bank-failures.html